Empirical Implications of Alternative Models of Firm Dynamics

This paper considers two models for analyzing the dynamics of firm behavior that allow for heterogeneity among firms, idiosyncratic (or firm specific) sources of uncertainty, and discrete outcomes (exit and/or entry). Models with these characteristics are needed for the structural econometric analysis of several economic phenomena, including the behavior of capital markets when there are significant failure probabilities, and the analysis of productivity movements in industries with large amounts of entry and exit. In addition, these models provide a means of correcting for the self-section induced by liquidation decisions in empirical studies of firms responses to alternative policy and environmental changes. It is shown that the two models have different nonparametric implications - implications that depend only on basic behavioral assumptions and mild regularity conditions on the functional forms of interest (one distinction between them corresponds to the distinction between heterogeneity and an ergodic form of state-dependence; a form in which the effect of being in a state in a particular period erodes away as time from that period lapses). The nonparametric implications enable the construction of testing and selection correction procedures that are easy to implement (they do not require the computationally difficult, and functional-form specific, estimation algorithms that have been used to empirically analyze stochastic control models with discrete outcomes in the past). The paper concludes by checking for the implications of the two models on an eight-year panel of Wisconsin firms. We find one model to be consistent with the data for retail trade.

A Model of Russia's "Virtual Economy"

The Russian Economy has evolved into a hybrid form, a partially monetized quasi-market system that has been called the virtual economy. In the virtual economy, barter and non-monetary transactions play a key role in transferring value from the productive activities to the loss-making sectors of the economy. We show how this transfer takes place, and how it can be consistent with the incentives of economic agents. We analyze a simple partial-equilibrium model of the virtual economy, and show how it might prove an obstacle to industrial restructuring and hence marketizing transition.http://deepblue.lib.umich.edu/bitstream/2027.42/39701/3/wp317.pd

Restructuring an Industry During Transition: A Two-Period Model

This paper develops the two-period model of enterprise shutdown during transition that was introduced in Ericson (1994). Its purpose is to provide a formal basis for the study of what Kornai (1994) has called the "transformation of the real structure of the economy" during the transition process. It focuses at the industry level of restructuring, taking a normative, industrial policy, perspective

The Stuctural Barrier to Transition: A Note on Input-Output Tables of Centrally Planned Economies

This note begins an exploration of one of the key legacies of the Soviet economic system, the physical structure of production and economic interaction, and its impact on the transition to a market-based system. It addresses some reasons for the size of the "shock" to the economy subsequent to the liberalization of prices, including the apparent disappearance of vast amounts of industrial output and an inflation driven by more than just monetary factors

An Alternative Theory of Firm and Industry Dynamics

This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyzes the behavior of individual firms exploring profit opportunities in an evolving marketplace and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behavior of all firms, including potential entrants, into a rational expectations, Markov perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium

An Alternative Theory of Firm and Industry Dynamics

This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyzes the behavior of individual firms exploring profit opportunities in an evolving marketplace and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behavior of all firms, including potential entrants, into a rational expectations, Markov perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium.Industry dynamics, exploratory investment, heterogeneous firms, Markov perfect equilibrium

Restructuring an Industry During Transition

http://deepblue.lib.umich.edu/bitstream/2027.42/39426/3/wp36.pd